The 10-year Treasury yield reached 5.23% on Friday, Sept. 25, its highest level since 2007. In 2023, by comparison, the yield's highest close was just under 5%.

And the rise has been quick. The benchmark yield began 2026 at around 4.2%, stood just below 4.8% at the start of September, and was back under 5% as recently as Tuesday, Sept. 22. Sticky inflation and heavy borrowing by both the federal government and firms building artificial intelligence data centers have helped drive it higher.

For savers, that's a real offer. Put $10,000 in a newly issued 10-year Treasury at around 5.2%, and the U.S. government pays around $520 a year for a decade before giving the $10,000 back.

Is that a better spot for new cash than an S&P 500 index fund like the Vanguard S&P 500 ETF (VOO +0.54%)? I don't think so. But I'd say it's a closer call than it's been in nearly two decades.

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The bond pays more up front

Going by what each earns now, the Treasury wins. Using the last 12 months of reported profits, FactSet pegs the price-to-earnings ratio of the S&P 500 at 25.8. Flip the ratio over, and the index earns about $3.90 a year for every $100 invested -- an earnings yield of about 3.9%, well below the bond's 5.2%.

And a fund investor doesn't even get most of that $3.90. The Vanguard fund, which trades near $711 a share as of this writing, has a dividend yield of about 1%.

Put another way, picking the fund over the bond means passing up about 4 percentage points of income in the first year. The rest of the index's earnings stays with the companies to reinvest or use for buybacks, and that's where the case for the fund starts.

How much growth does the index need?

The Treasury's $520 a year never grows. The index's earnings can, and they usually have.

At a dividend yield of around 1%, the fund needs its companies' earnings to grow about 4% a year to match the bond's 5.2% over a decade, if investors keep paying the same price-to-earnings multiple. Based on Robert Shiller's long-term S&P 500 data, earnings rose at least this fast in around 80% of the 10-year stretches that started from 1950 on. The median stretch had earnings growth of about 6% a year. Even more, over the 10 years through June, the index's earnings rose around 13% annually.

Do the math for $10,000. At 6% earnings growth and a 1% dividend, the fund would compound to around $19,700 in 10 years at the same valuation. The bond, with its interest reinvested at 5.2%, would finish near $16,600.

There's another difference after year 10. The bond matures, and its holder needs to reinvest at whatever the next one offers. Someone who locked in around 5% on a 10-year Treasury in July 2007 saw the 10-year yielding about 2.3% when that bond came due.

The index's earnings, meanwhile, could keep compounding for as long as the investor holds the fund.

When the bond wins

Of course, all these numbers assume the price-to-earnings ratio stays steady. A falling one is arguably the biggest risk of buying the index at today's price.

Starting at around 26 times earnings, the index's valuation multiple would just need to ease to about 22 times earnings over the decade for 6% earnings growth to trail the Treasury. That would still be under the S&P 500's 10-year average price-to-earnings ratio of 23.6, but well above its long-run average of around 16.

It's happened before. In January 2000, the S&P 500's price-to-earnings ratio stood near 29, and the 10-year Treasury paid about 6.7%. Over the next decade, the index's total return was slightly negative, while the bondholder collected every coupon.

In the end I think a 5.2% Treasury is the toughest competition the index has faced since 2007. If the market's price-to-earnings multiple drifts back toward its long-run average, the bond might win the next decade outright.

But the fund doesn't need a boom to keep pace. It needs its companies' earnings to grow around 4% a year, a pace the index has beaten in about four in five decade-long stretches since 1950. For money I won't need for well over 10 years, I'd still pick the index fund. For money needed sooner, a government-backed 5.2% is tough to argue with.